Italy vs Costa Crociere SpA, July 2024, Supreme Court, Case No 20228/2024

Posted on | By Courts of Italy
Category: Burden of Proof, Delineation - Substance over Form, Financial Transactions, Legality - Legitimacy - Constitutional, Non-Recognition and Recharacterisation | Tag: , , , , , , ,
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One of the issues in this case was the arm’s length nature of an agency agreement between Costa Crociere and its Brazilian subsidiary, Costa Cruzeiros Agencia Maritima e Turismo Ltda.

The tax authorities had reclassified the said agency agreement between Costa Crociere and its Brazilian subsidiary as a loan. According to the tax authorities, the funds transferred under this agreement, amounting to approximately €40 million, were in fact a long-term loan and, on this basis, interest income was added to Costa Crociere’s taxable income on the basis of transfer pricing adjustments using a LIBOR interest rate adjusted for country risk.

In the appeal to the Supreme Court, Costa Crociere argued that the tax authority had no right to recharacterise the transaction as a loan and, if permissible, had incorrectly calculated the interest due.

Judgment

The Supreme Court disagreed that the tax authorities were bound by the agreement between Costa Crociere and its Brazilian subsidiary.

However, the Court agreed with Costa Crociere that the lower courts had not adequately analyzed the economic substance of the transaction, the actual risks borne by both parties, or the parent company’s own financial records. As a result, the case was sent back to the Liguria Regional Tax Commission for further review, with instructions to conduct a detailed analysis based on these legal principles.

 

Excerpts in English
“7.5. The case law of the Court, on the subject of transfer pricing, relating to non-interest-bearing financing (most recently Supreme Court of Cassation 20/05/2021, no. 13850; Supreme Court of Cassation 15/11/2017, no. 27018), holds that ‘the assessment “based on the normal value” is irrespective of the original capacity of the transaction to produce income and, therefore, of any negotiating obligation of the parties relating to the payment of the consideration (see OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 1.2). It is, in fact, a matter of examining the economic substance of the transaction that has taken place and comparing it with similar transactions carried out, in comparable circumstances, in free market conditions between independent parties and assessing its conformity with these>>.

Paragraphs 1.121 et seq. of the OECD Guidelines (in the 2017 version) envisage the possibility of disallowing or substituting the transaction between the parties, but under very strict conditions and, above all, after all the necessary steps have been taken to accurately delineate the actual transaction between the parties, which is a preliminary operation in any transfer pricing analysis; to this end, it is necessary to start from the content of the contract, examine the actual economic substance of the transaction, its commercial rationality and always with reference to the need to compare it with similar transactions between independent enterprises.
Para. 1.122 provides that <>; while para. 1.123 provides that <>.

7.6. In light of these considerations, it must therefore be held, firstly, that the CTR did not make any assertion in breach of the principle of allocation of evidentiary burdens but examined the merits of the respective deductions; secondly, it must be noted that the decision of the case did not exclusively pose a problem of interpretation of the contract (as the Attorney General’s Office held, in order to support the inadmissibility of the plea); thirdly, it should be noted that the office, and therefore the CTR, was not precluded in the abstract from re-qualifying the contract (thus proving unfounded the first complaint of the first plea, which highlighted the absolute inadmissibility of a re-qualification); However, it must be held that the appeal judges erred, in disallowing and replacing the transaction between the parties, in giving relevance solely to the accounting data of the subsidiary, which had included those items in medium- and long-term debts, without actually examining in the least the content of the contract, its economic substance, the risks contractually assumed and the accounting carried out by the parent company (which carried out a careful analysis and explanation of its own accounting) and, above all, in making a comparison with similar situations.

The plea should therefore be upheld in the terms set out above, and the judgment should be set aside on this point, with a reference back to the Court of Tax Appeals at second instance for it to carry out a new examination in the light of the aforementioned principles.

9. In conclusion, the third plea in the main appeal must be upheld, the first plea absorbed and the others dismissed; the first plea in the cross-appeal must also be upheld, the second dismissed and the third dismissed.

The judgment should be set aside in relation to the grounds upheld, with reference back to the Court of Second Instance of Liguria, in a different composition, which will have to rule on the basis of the aforementioned principles of law, and to which the task of ruling on the costs of the proceedings of legitimacy is assigned.”

 

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Related Guidelines

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Supplemental Guidance

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